Lessons learned from the mar­ket down­turn

Cape Breton Post - - BUSINESS -

It’s been about a year since global stock mar­kets started their re­cov­ery. While you can’t con­trol the forces that led to the de­cline, you can learn from what hap­pened and use this knowl­edge to help make the right in­vest­ment moves in the fu­ture — so you can be pre­pared for an un­cer­tain fu­ture.

What lessons should you take away from the mar­ket drop? Con­sider the fol­low­ing:

Look for­ward, not back: Af­ter a steep down­turn, many in­vestors “shy away” from stocks and stock­based mu­tual funds. But if you had done this fol­low­ing the de­cline that bot­tomed out in March 2009, you would have missed the siz­able rally that fol­lowed. No one can re­ally fore­cast mar­ket per­for­mance, but if you base all your in­vest­ment de­ci­sions on yes­ter­day’s re­sults, you’ll even­tu­ally miss out on to­mor­row’s op­por­tu­ni­ties.

In­vest with dis­ci­pline: A de­clin­ing mar­ket tends to drag most in­vest­ments down with it, but many in­vestors made things worse for them­selves by hav­ing pre­vi­ously chased af­ter “hot” stocks, which fell hard — and, just as im­por­tantly, may have been in­ap­pro­pri­ate for their needs in the first place. By main­tain­ing the dis­ci­pline to stick with an in­vest­ment mix that’s suit­able for your risk tol­er­ance and long-term goals, you can help blunt the im­pact of a mar­ket down­turn.

Stay di­ver­si­fied: Dif­fer­ent types of as­sets, such as stocks and bonds, of­ten move in dif­fer­ent di­rec­tions. If a down­turn hits one as­set class par­tic­u­larly hard, and most of your in­vest­ment dol­lars are tied up in that as­set, your port­fo­lio will take a big­ger hit than if you had di­ver­si­fied across an ar­ray of in­vest­ments. While di­ver­si­fi­ca­tion, by it­self, can­not guar­an­tee a profit or pro­tect against loss, it can help re­duce the im­pact of volatil­ity and help give you more chances for suc­cess.

Bor­row with cau­tion: Ex­ces­sive bor­row­ing was a root cause of the global fi­nan­cial cri­sis — and, on an in­di­vid­ual level, too much debt can be equally dev­as­tat­ing. Un­for­tu­nately, in 2009, many Cana­di­ans in­creased their debt, de­spite tight credit con­di­tions. Try to keep a lid on your debt load: the lower your debt pay­ments, the more money you’ll have avail­able to in­vest for re­tire­ment and other goals.

Pro­tect what’s im­por­tant: Dur­ing the long mar­ket down­turn, you may have been con­cerned about the value of your port­fo­lio. Yet even as you take steps — such as di­versi- fy­ing your hold­ings — to help pro­tect your port­fo­lio from the ef­fects of volatil­ity, you also need to pro­tect your­self against other risks that could dis­rupt your life. Specif­i­cally, make sure you have the proper amounts and types of in­sur­ance in place.

Fol­low time-tested prin­ci­ples: Which in­vestors fared best dur­ing the mar­ket down­turn and the re­cov­ery that fol­lowed? Those that have fol­lowed proven tech­niques, such as buy­ing qual­ity in­vest­ments, stay­ing in­vested, and re­bal­anc­ing their port­fo­lios as needed in re­sponse to changes in their in­di­vid­ual sit­u­a­tions, their goals or the eco­nomic en­vi­ron­ment.

Philoso­pher Ge­orge San­tayana once wrote: “Those who can­not re­mem­ber the past are con­demned to re­peat it.” This thought cer­tainly ap­plies to in­vestors who made some mis­takes in re­sponse to the mar­ket down­turn of 2008 and early 2009. But if you can learn the lessons from the volatil­ity we’ve ex­pe­ri­enced, you’ll be po­si­tioned to con­tinue mak­ing progress to­ward your fi­nan­cial goals — in good or bad mar­kets.

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